Fight back against rising prices!

Find out how to protect your finances from inflation - before it's too late!

The latest figures reveal inflation fell slightly this week, by 0.1%. But this is hardly a cause for celebration.

At 3.1%, inflation remains above the Government target at 3% for the eighth quarter in a row. Record petrol price rises, rocketing grain prices and fresh VAT hikes will see inflation continue to rise this year.

And the Bank of England has shown no sign that it plans to increase interest rates from their current, record low level in the near future – despite the fact that is one of the few economic measures that can help to curb inflation quickly.

If you have any savings, I wouldn’t blame you if you were shaking your head in despair right now. Inflation is the enemy when it comes to your savings because it attacks real returns, and reduces the purchasing power of your cash.

What exactly is inflation?

In simple terms, inflation means the price of everyday goods and services we buy is rising. The government’s favoured measure of inflation is known as the Consumer Prices Index or CPI. The CPI is currently 3.1% which means prices are 3.1% higher now than they were a year ago.

Why does inflation matter?

When inflation is high the same amount of cash will buy less than it could the previous month or year. Hopefully, your salary will rise in line with inflation at least, so you can continue to buy just as much as you could before. People on fixed incomes are particularly vulnerable to high inflation, and it’s also bad news for savers.

Why is inflation rising?

 Petrol prices are creeping towards a record high, with the average price of a litre set to reach £1.20 by the August Bank Holiday, according to new figures from the petrol forecourts association.

Russia’s ban on grain exports will push supermarket prices up, while VAT will jump 2.5 percentage points in January to 20% as the new Government struggles to control Britain’s huge national deficit. This triple-whammy of price rises is bad news for savers everywhere.  

How does inflation affect my savings?

To earn a real return on your money, you’ll need a savings account with a rate high enough to beat tax and inflation. If you’re a basic rate taxpayer, you’ll lose 20% of your interest to the taxman. In other words, if your savings rate is 4% before tax, it’ll be 3.2% after tax with the 20% deduction.

From the net 3.2% rate, you’ll have to take away the rate of CPI inflation next. So, since the CPI is 3.1%, your real return in this case is actually 0.1%. Putting it another way, for a basic rate taxpayer to beat tax and inflation, they would need to earn a rate on their savings of at least 4%.

Luckily, this is still possible if you’re prepared to jump through a few hoops. Read Earn 4% on instant access savings to find out more.

For a higher rate taxpayer to earn a real return they would need to earn a gross rate on their savings of more than 5.16% as they’ll lose 40% of their interest in tax.

Unfortunately for higher rate taxpayers, no high street savings provider currently offers such a high return on your savings. You can, however, opt for an ISA that pays more than 3.1% and beat inflation that way – because you’re don’t pay tax on the interest you earn in an ISA. Read The top 18 cash ISAs to find out which accounts offer the best rates at the moment.

Inflation-beating spending tips

Motorists are set to be hit hardest by rising prices over the coming year, with prices at the pump set to beat the 120p a litre barrier. Fortunately, there are ways to combat these massive price hikes. The first is to hunt down the cheapest prices in your area by signing up to price comparison website Petrolprices.com. Registration is free and signing up allows you to enter your postcode and find the cheapest petrol outlets in your area.

Another way to cut petrol costs is to sign up to any available loyalty schemes - both Tesco and Sainsbury’s allow shoppers to collect Clubcard and Nectar points on fuel purchases, which you can use to subsidise your food shopping. You can also opt to utilise a cashback credit card to gain further rewards when you fill up. Find out how to cut your petrol costs by a third for more information.

Here at lovemoney.com we have myriad ways to cut the cost of food and supermarket shopping but if you’re planning to make a big ticket purchase in the coming months it could pay to think strategically. Items such as digital cameras, clothing and computer games have all risen in price over the past year, but homeware, white goods and TVs have all become cheaper over the past year, according to the British Retail Consortium.

If you have a big purchase to make it could pay to take out a 0% on purchases credit card before prices start to rise and pay it off within the interest-free period. Read The card you must have for purchases for more information about this strategy.

Finally, why not make it your goal to save even more? Or take control of your finances with our online banking tool?

More: Should we bother listening to house price indices? | The worst rip-offs in Britain | Get the best savings account